On a day-to-day basis tonnes of shipping containers or cargo containers are transported over long distances from one location to another via different modes of transportation be it land, rail, air, or sea. The type of goods being shipped may range from food products, delicate equipment, perishable items, fuels to hazardous chemicals. Shipping of humongous amount of cargoes on a daily basis poses an unforeseen risk of losses and damages while in transit.
Plunging oneself into the export-import business with insufficient knowledge of exposed risks and perils can be a horrendous mistake. But the nightmare is over once you know how can you prevent such huge losses or mitigate the risks when posed. And the correct solution to all these risks and losses is provided by cargo insurance. Insurance is most likely to cover only fortuitous losses and not the ones which are predictably bound to occur.
What is cargo insurance?
In simple terms, Cargo insurance, also known as Freight Insurance can be defined as the insurance policy specifically designed to provide an all-inclusive coverage to cargo against a wide array of physical loss or damage to freight while in transit carried out in the water, air, road, rail, registered post parcel & courier. It works as a contract where the insurer takes the obligation to indemnify the insured in case of any damage or loss as mentioned in the policy. Insured must have an insurable interest in the goods at the time of loss. The insurable interest and the legal obligation to reimburse are usually determined by a term of delivery, such as Incoterms or International Commercial Terms published by the International Chamber of Commerce (ICC). These terms define the responsibilities of buyers and sellers.
Why is cargo insurance important?
Imagine you're a buyer/seller and you are at risk under the incoterms for goods that place the liability of those goods while in transit over you. In every step of the voyage, it is highly likely that somewhere during the journey there may be inevitable perils, hazards, or damages. During such testing times, Cargo Insurance comes to the rescue and compensates for the loss.
What are the different types of cargo insurance?
Among the various cargo insurance provided by Insurance Companies, choosing the best policy for one after weighing down the limitations and coverage provided can be a daunting task. But once you become aware of all types of cargo insurance and policies in detail, it's smooth sailing in the export-import business.
Under the benefits of this insurance, protection against damages due to inappropriate packing, infestation, cargo abandonment, customs rejection, employee's dishonesty, damages due to collision, damages due to heavy weather, sinking, derailment, non-delivery, theft, and fire included.
Weighing down the different types of insurance policies to help you navigate through the complexity of cargo insurance:
Based on the mode of transport following are the common types of Cargo Insurance:
Land Cargo Insurance or Haulier Insurance
Marine Cargo Insurance
Air Transport Insurance
Many factors come into play while determining the type of coverage to be purchased such as distance traveled by the shipment, fragility of cargo, value of the cargo, etc.
The coverage and limitations of each type of cargo insurance are discussed below:
Land Cargo Insurance
Often known as Haulier Insurance, it covers the freight when transported via land including cargo shipments boarded on trucks or other vehicles. This insurance is domestic and coverage is only applicable within and across the country.
Coverage: collision, theft, and damages due to other risk factors
Marine Cargo Insurance
It includes carriages transported both via land and air. Unlike land cargo insurance, it is applied to broader boundaries i.e. international transportation.
Coverage: Damages while loading/unloading, bad weather, piracy, and other related risk factors.
Types of marine cargo insurance coverage
The most common types of cargo insurance are:
A. All Risk: Any physical loss or damage from external causes is covered by the all-risk policy.
Coverage:
Collision with an external object
Jettison
Train derailment
Truck overturning
Deliberate destruction
Improper stowage by shipowners
Theft
Natural calamities (Earthquake, Lightning stroke)
Exclusion:
Damage to cargo as a result of negligence
Inherent vice
Customs Rejection
Cargo abandonment
Loss of use/market
Failure to pay/collect
WSRCC (WAR, Strikes, Riots and Civil commotions)
B. Free of Particular Average(FPA): It is also known as a Named Peril policy and covers damages mentioned by the policy
Coverage:
Collision
Stranding
Burning
Sinking
Train derailment
Truck overturning
Non-delivery
Few natural calamities
Limitation:
Theft
C. Shipment-by-Shipment: It is mediated through the carrier who is shipping the goods.
Limitation:
Defects in transportation vessel
Employee's dishonesty
War
Natural calamities
D. General Average: In the marine cargo transits, this coverage is the fundamental requirement. It only covers partial losses incurred to the shipment. Other cargo owners present on board need to compensate the periled cargo owner.
E. Warehouse to Warehouse: This is applicable when the shipment is unloaded from the ship and gets transported to the customer's warehouse. Only the insurance holder's cargo is compensated and not other's cargoes.
Types of cargo insurance policies
The following policies help us to comprehend cargo protection more readily:
A. Open Cover Cargo Policies: In case an insurance holder opts for coverage against various consignments, then the Open Cover Cargo Policy gets activated.
These are bifurcated as follows:
·Renewable Policies: It is required after policy expiration for renewal for a particular value accounting mostly for single trip or voyages.
Permanent Policies: It is drawn up for a decided course of time authorizing countless shipments in that duration.
B. Specific Cargo Policies: Also known as, voyage policies. When a seller approaches an insurance company for insuring a particular shipment, then it falls under this category.
C. Contingency Insurance Policy: There are certain cases where customers are responsible to insure the goods against damages, not the sellers. In such cases sometimes the customers tend to avoid liability and refuse to accept them. This policy comes in handy in such scenarios.
What is necessity to obtain cargo insurance coverage?
Benefits of Cargo Insurance:
Cargo Insurance is very important for local and international trade in the supply chain industry. Approximately 90% of goods transportation is mediated via the sea. And a major chunk of sea transportation is carried out via shipping containers.
So, if you own an export-import business, it's a must to weigh down the importance of cargo insurance before you invest a big chunk of money to ship the product every time. But it has been observed that many businessmen tend to ignore it and end up facing immense losses. The sellers then try to seek help from the legitimate framework but this then causes them a lot of money with not enough reimbursement. Therefore, sellers are encouraged to purchase cargo insurance which has an extraordinarily less premium rate to protect the full value of cargo.
As Richard Cushing, an American prelate of Roman Catholic Church rightly said- "Always plan ahead. It wasn't raining when Noah built the ark."